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1 GAO August 1996 United States General Accounting Office Report to the Chairwoman, Subcommittee on Railroads, Committee on Transportation and Infrastructure, House of Representatives FEDERAL EMPLOYERS LIABILITY ACT Issues Associated With Changing How Railroad Work-Related Injuries Are Compensated GAO/RCED G A O years

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3 GAO United States General Accounting Office Washington, D.C Resources, Community, and Economic Development Division B August 15, 1996 The Honorable Susan Molinari Chairwoman, Subcommittee on Railroads Committee on Transportation and Infrastructure House of Representatives Dear Madam Chairwoman: In response to your request, this report examines the issues associated with changing how railroad workers are compensated for their work-related injuries. In particular, we identify the potential implications for railroad costs and railroad workers of (1) replacing the Federal Employers Liability Act (FELA) with a no-fault compensation system or (2) modifying FELA. We also discuss FELA s effects on small railroads and the availability and affordability of insurance to protect small railroads against large FELA payouts. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of Transportation, the Secretary of Labor, and the Director, Office of Management and Budget. We will also make copies available to others upon request. Please call me at (202) if you or your staff have any questions. Major contributors to this report are listed in appendix V. Sincerely yours, John H. Anderson, Jr. Director, Transportation and Telecommunication Issues

4 Executive Summary Purpose Unlike most American workers, railroad workers are not covered by state no-fault workers compensation insurance systems when they are injured on the job. Instead, railroad workers must recover their losses under the provisions of the Federal Employers Liability Act (FELA). Under FELA, an injured worker negotiates a settlement with the railroad. If the negotiations fail, the worker may file a lawsuit alleging negligence by the employer to recover losses. No-fault systems do not require that the parties demonstrate negligence. The Chairwoman, Subcommittee on Railroads, House Committee on Transportation and Infrastructure, asked GAO to identify the implications for railroad costs and railroad workers of (1) replacing FELA with a no-fault compensation system or (2) modifying FELA. GAO was also asked to assess how FELA particularly affects small railroads (those with annual revenues of less than $250 million) and determine the availability and affordability of insurance to protect small railroads against large FELA payouts. Background FELA was enacted in 1908, a time when the railroads were the nation s largest employer and rail work was especially hazardous. At that time, injured railroad workers had difficulty getting compensated under the common law that governed injury compensation. Railroads often avoided paying compensation for on-the-job injuries by arguing, for example, that a coworker s negligence had caused an injury or that workers assumed the risk of injury at the time they accepted employment. In an effort to better protect workers against financial loss and to make the railroads more accountable and responsible for work-related injuries, FELA limited the railroads defenses against liability for compensating injured workers. Such limitations provided railroad workers with more protection than other employer liability laws of the time, but workers were still required to establish negligence. At about the same time, the individual states were enacting no-fault workers compensation systems. Today, most workers in other industries are covered under state workers compensation systems, but railroad workers continue to be covered under FELA. FELA allows workers to seek recovery for economic damages (such as lost wages) and noneconomic damages (such as pain and suffering), while workers compensation systems typically limit recovery to economic losses. Many in railroad management believe that FELA should be replaced or changed. In general, railroad management is dissatisfied with FELA because, among other things, the need to demonstrate negligence creates an adversarial relationship between management and labor. Management also believes that the system is excessively litigious, that FELA lawsuits are Page 2

5 Executive Summary often filed in court jurisdictions that have historically been favorable to plaintiffs, and that the system is unnecessarily costly. Railroad labor officials, on the other hand, believe that FELA is working well and should not be replaced or changed. In labor s view, FELA provides workers with the opportunity to fully recover their losses from on-the-job injuries and provides railroads with an incentive to operate safely. Railroad labor believes the problem is not that FELA provides workers with excessive compensation but that no-fault compensation systems provide too little compensation. Results in Brief Whether replacing FELA with a no-fault compensation system would reduce railroad costs depends to a large extent on the number of workers who are permanently disabled by on-the-job injuries. If many of the railroad workers who currently leave a railroad after receiving a FELA settlement are physically capable of returning to work, then total injury compensation costs for the railroads could be less under a no-fault system. On the other hand, if about two-thirds or more of these workers were permanently and totally disabled and unable to return to any work, the costs of a no-fault compensation system could be the same as or higher than under FELA. Railroad management believes that some railroad workers who leave a railroad after taking their FELA settlement are physically capable of returning to work and, therefore, would not receive long-term benefits under a no-fault system. However, little information is available on how many railroad workers who leave a railroad after taking a FELA settlement are physically capable of returning to work. For those workers who can return to work at their preinjury wages, the railroads compensation costs would be less under a no-fault system because it does not provide compensation for noneconomic losses. Modifying FELA could reduce the railroads costs. For example, placing caps on awards for noneconomic damages or on plaintiffs attorneys fees might reduce injury compensation costs, depending on what proportion of FELA awards are represented by noneconomic damages and how attorneys fees relate to settlement amounts. On the other hand, such modifications could adversely affect railroad workers by reducing the compensation they receive and limiting the availability or quality of their legal counsel. Small railroads 1994 FELA costs per employee-hour worked were less than those of larger railroads. In part, this is because small railroads had, on average, fewer lost workdays per injury than the large railroads and a lower percentage of injuries that resulted in lost work time. GAO also found Page 3

6 Executive Summary that the small railroads rely heavily on insurance to protect against large payouts under FELA. It appears that at the current time, liability insurance that includes FELA coverage is both available and affordable. Principal Findings Cost Impact of Replacing FELA With a No-Fault Compensation System Depends on Many Factors The cost of replacing FELA with a nationwide no-fault injury compensation system depends on a number of factors. One of the most important is the number of injured railroad workers who are permanently disabled by their injuries and unable to return to work at their preinjury wages. Under FELA, some workers leave their railroad after receiving a lump-sum FELA settlement. Little information is available on how many of these workers are able to work. GAO estimates that if about two-thirds or fewer of the injured workers at four large railroads had been permanently and totally disabled, then the costs under a no-fault compensation system could have been the same as or lower than those under FELA. To produce this estimate of the potential benefits of replacing FELA with a no-fault system, GAO used a cost analysis model developed for the Association of American Railroads. The model used information on claims under FELA that were closed in 1994 for four railroads that employ about 60 percent of the workers at large railroads. To calculate the costs under a no-fault alternative, GAO used the benefit provisions of the two nationwide systems covering civilian federal workers and maritime workers the systems under the Federal Employees Compensation Act (FECA) and the Longshore and Harbor Workers Compensation Act (LHWCA), respectively. Using the model, GAO found that overall injury compensation costs would have been less under a no-fault system if fewer than 65 or 70 percent (depending on whether FECA- or LHWCA-level benefits are used) of the injured rail workers at these railroads who accepted FELA settlements and left the railroad had been less than permanently and totally disabled and were able to return to work. GAO also estimates that for the group of injured workers who continued to work at their railroad after a settlement, the railroads might have saved about $100 million in compensation costs. Replacing FELA with a no-fault compensation system would likely reduce the railroads administrative costs. With the elimination of the need to investigate negligence and assess noneconomic damages, the costs of processing injury claims would be lower than they are under FELA. Page 4

7 Executive Summary Although rehabilitation costs can be compensated under FELA, rehabilitation plays a larger role in no-fault compensation programs, and railroads might incur higher costs for these services. Modifying FELA Would Likely Reduce Railroads Costs but Could Also Adversely Affect Workers In lieu of replacing FELA, the Congress could modify it. GAO found that some modifications have the potential to reduce the railroads injury compensation costs. For example, placing a cap on compensation for noneconomic losses could reduce costs. Because the data that GAO received from the railroads did not identify the proportion of each FELA award represented by noneconomic damages, a precise estimate of the savings from capping them could not be made. However, on the basis of an examination of the FELA claims that were closed at four large railroads in 1994, GAO found that under a range of assumptions about these proportions and using $250,000 as a cap (an amount considered in recently proposed legislation on the National Railroad Passenger Corporation), the railroads might have saved between $7 million and $48 million of the $479 million they paid out in Placing a cap on plaintiffs attorneys fees is also a way to reduce costs. However, any savings would depend on the relationship between these fees and settlement amounts. Rail labor organizations told GAO that attorneys currently receive no more than 25 percent of a FELA award. Although these options might reduce the railroads FELA costs, they could adversely affect injured railroad workers. For example, a cap on noneconomic damages could reduce the compensation that such workers receive. Similarly, placing a cap on plaintiffs attorneys fees might affect the availability or the quality of the workers legal counsel. On the other hand, capping plaintiffs attorneys fees might, in some cases, increase the amount of the settlement that goes to the injured worker. The position of current railroad workers could be protected by continuing to cover them under FELA and its present provisions (known as grandfathering ). This solution, however, could increase the railroads costs to administer injury compensation cases and could create a situation in which employees with similar injuries have access to different types and amounts of compensation. Page 5

8 Executive Summary Small Railroads Have Lower FELA Costs and Rely on Insurance to Protect Against Large Payouts Small railroads experience with FELA has differed somewhat from that of the large railroads. In a survey of 560 small railroads, GAO found that, in general, the small railroads injury compensation costs under FELA were less than those of the large railroads. In 1994, the small railroads paid about $42 million in FELA costs, or about $0.96 per employee-hour worked. In contrast, the large railroads paid about $2.26 per employee-hour worked. Some of this cost difference may be attributable to the fact that the small railroads had, on average, fewer lost workdays per injury than the large railroads 30 days compared with 77 days and lower average wages. In addition, in 1994, only 54 percent of the injuries on the small railroads resulted in lost workdays, compared with 67 percent on the large railroads. GAO also found that the small railroads rely heavily on insurance to protect themselves against large FELA payouts. GAO s survey found that about 88 percent of the small railroads are covered by insurance that includes FELA coverage. Most of the large railroads have high deductibles and are generally considered self-insured for FELA purposes. GAO found that for the small railroads, liability insurance covering FELA is currently readily available and appears to be affordable. Recommendations Agency Comments GAO is making no recommendations in this report. GAO provided officials of the Departments of Transportation and Labor with copies of a draft of this report. GAO met with officials from these agencies, including the Chief of the Industry Finance Staff at the Department of Transportation s Federal Railroad Administration, and the Deputy Director, Division of Federal Employees Compensation and the Director, Division of Longshore and Harbor Workers Compensation at the Department of Labor. The Department of Transportation officials said they had no reason to disagree with the reports contents and had no comments. The Department of Labor officials provided GAO with technical comments on the FECA and LHWCA programs, which GAO incorporated where appropriate. Page 6

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10 Contents Executive Summary 2 Chapter 1 Introduction 12 Railroads Injury Compensation Differs From That of Other 12 Industries Railroad Management and Labor Differ Over Continued Need for 16 FELA Objectives, Scope, and Methodology 18 Agency Comments 20 Chapter 2 Cost Savings From Replacing FELA With a Nationwide No-Fault Compensation System Depend on Many Factors Chapter 3 Modifying FELA Might Reduce Railroads Costs but Could Adversely Affect Workers 21 Impact of No-Fault System on Injury Compensation Costs 21 Depends on Severity of Injuries Administrative Costs Under a No-Fault System Might Be Less 25 Than Under FELA, but Costs for Rehabilitation Could Be Higher Resolving Disputed Claims May Still Be Time-Consuming 26 Conclusions Capping the Noneconomic Portion of FELA Awards Could 28 Reduce Costs but Decrease Workers Benefits Limits Placed on Plaintiffs Attorneys Fees Could Benefit 29 Railroads, but Impact on Workers Is Uncertain Arbitration Offers Time and Cost Benefits but May Be Difficult to 31 Adapt to FELA The Congress Could Limit Where FELA Suits Can Be Filed, but 32 Effects Are Uncertain Opting Out of FELA May Have Unintended Consequences for 34 Railroads and Labor The Congress Could Grandfather the Current Workforce Under 36 FELA Conclusions 36 Page 8

11 Contents Chapter 4 FELA Is Less Expensive for Passenger and Small Freight Railroads Appendixes Tables 38 FELA Costs Were Less for Passenger and Small Freight Railroads 38 FELA Costs Were Not the Same for All Small Railroads 40 Small Railroads Rely on Insurance to Protect Against Large FELA 42 Awards Insurance Is Currently Available and Affordable 44 Insurance Purchasing Groups Are Not Widely Used 45 Conclusion 46 Appendix I: Methodology for Estimating Cost Differences 48 Between FELA, FECA, and LHWCA Appendix II: Small Railroads Responses to GAO s Questionnaire 60 on Experiences With FELA Appendix III: Passenger Railroads FELA Costs, Appendix IV: Organizations Contacted for This Review 70 Appendix V: Major Contributors to This Report 73 Table 1.1: Number of FELA Injury Claims and Suits Settled by 14 Large Freight Railroads and Amtrak, Table 1.2: Average Payout per Settled FELA Injury Claim and 14 Lawsuit for Large Freight Railroads and Amtrak, Table 3.1: Potential Effect of $250,000 Cap on Noneconomic 29 Damages for Claims Closed by Four Large Railroads in 1994 Table 4.1: Summary of 1994 FELA Compensation Costs by Type 39 of Railroad Table 4.2: Summary of 1994 FELA Administrative and Legal Costs 40 by Type of Railroad Table 4.3: Summary of 1994 FELA Compensation Costs by Type 40 of Small Freight Railroad Table 4.4: Summary of 1994 FELA Administrative and Legal Costs 41 by Type of Small Freight Railroad Table I.1: Estimated Payouts in 1994 for Four Large Railroads 56 Using Various Assumptions About the Incidence of Permanent Total Disability Among Workers Who Did Not Return to Work Following a FELA Settlement Table I.2: Estimated Payouts in 1994 for Four Large Railroads for 59 Workers Who Returned to Work Following a FELA Settlement Table II.1: Responses to Question 1 on FELA Settlements in Page 9

14 Chapter 1 Introduction Unlike most American workers, when railroad workers are injured on the job, they are not covered by state no-fault workers compensation insurance systems. Instead, they must seek to recover their losses from the railroads under the provisions of the Federal Employers Liability Act (FELA). Under FELA, injured workers must either negotiate a settlement with the railroad or file a lawsuit against the railroad to recover their losses. FELA allows injured workers to recover noneconomic damages, such as pain and suffering, in addition to economic damages, such as medical expenses and lost wages. In contrast, the benefits paid under no-fault workers compensation systems are largely limited to medical expenses and lost wages. Under FELA, if a lawsuit is filed, workers must show negligence on the part of the employer; under no-fault systems, issues of negligence are not a factor. Railroad management s and labor s opinions differ over how well FELA is working. Management, which favors replacing FELA, believes that FELA creates an adversarial environment between the railroads and their employees and is unnecessarily costly. On the other hand, railroad labor believes that FELA is working well and allows injured employees to receive better compensation for their injuries than they would under no-fault alternatives. Labor also believes that FELA provides railroads with an extra incentive to operate safely. Railroads Injury Compensation Differs From That of Other Industries Compensating railroad workers injured on the job is governed by the provisions of FELA. If negotiations between an injured worker and a railroad fail to result in a settlement, then the worker can sue to recover both economic damages and noneconomic damages. In contrast, most American workers are covered by state workers compensation systems that are essentially no-fault insurance systems. Although compensation under these systems varies from state to state, the benefits are largely limited to economic damages lost wages, medical expenses, and rehabilitation costs. There are also two federally administered no-fault workers compensation systems. Civilian federal employees are covered by the Federal Employees Compensation Act, and employees in the maritime industry are covered by the Longshore and Harbor Workers Compensation Act. 1 1 For more information about how FELA operates and how it compares with no-fault compensation systems, see Compensating Injured Railroad Workers Under the Federal Employers Liability Act, Special Report 241, National Research Council, Transportation Research Board (Washington, D.C.: National Academy Press, 1994). Page 12

15 Chapter 1 Introduction FELA Governs Railroads Injury Compensation FELA was enacted in 1908, at a time when railroads were the largest employer in the United States and rail work was particularly hazardous. Prior to the act s passage, injured railroad workers had difficulty recovering losses resulting from workplace injuries. Under the common-law doctrine of negligence, railroads often avoided paying compensation for on-the-job injuries by arguing, for example, that employees assumed the risk of injury at the time they accepted employment or that an injury had been caused by a fellow employee. At about the same time, efforts were underway in various states and at the federal level to enact employers liability legislation that would limit these defenses and increase employers liability for workplace injuries. In an effort to better protect workers against financial loss and to make the railroads more accountable and responsible for work-related injuries, FELA limited the railroads defenses against liability for compensating injured workers. As such, it provided railroad workers with more protection than other employer liability laws of the time. FELA covers virtually all railroads operating in interstate service, including the freight railroads, the National Railroad Passenger Corporation (Amtrak), and most commuter railroads. 2 Under the act, injured workers can seek recovery of all their losses, including economic losses, such as actual and future wage losses, and noneconomic losses, such as pain and suffering. If negotiations between a railroad and an employee do not produce a settlement, employees can seek recovery of their losses in a state or federal court. Should a lawsuit be filed, an employee must show that the railroad was negligent in order to recover damages. However, an employee s recovery for losses might be reduced to the extent that the employee s own negligence caused an injury, and in some instances, the employee could receive nothing. As a result, injured workers may not recover all of their losses, and some workers might not recover any. In addition to compensation under FELA, injured employees may also be eligible for retirement benefits, sickness benefits, and disability annuities from the Railroad Retirement Board. 3 In 1994, the railroads paid about $1.2 billion in FELA costs, and nearly 75 percent of all FELA injury claims for the large railroads (excluding the 2 FELA also covers maritime employees who are governed by the Jones Act but does not cover the Alaska Railroad or railroads operating solely within a company-owned plant. 3 The Railroad Retirement Board is a federal agency that administers the Railroad Retirement and Railroad Unemployment Insurance acts. Any sickness benefits paid must later be paid back to the Railroad Retirement Board from a subsequent settlement under FELA. Between July 1994 and June 1995, a total of $55.1 million in sickness benefits was paid, and $29.9 million was recovered. Recoveries do not necessarily occur in the same year that the benefits are paid. Page 13

16 Chapter 1 Introduction occupational illnesses of hearing loss and asbestosis) were settled between the railroads and the injured employees without a lawsuit. 4 While the total number of injury claims has declined since 1990, the number of lawsuits has remained relatively stable at about 3,100 cases per year. (See table 1.1.) Over the same period, railroad employment declined from 296,000 to 267,000. The average payout per negotiated claim increased from about $24,000 in 1990 to about $34,000 in 1994, while the average payout per lawsuit remained relatively stable at about $160,000. (See table 1.2.) Table 1.1: Number of FELA Injury Claims and Suits Settled by Large Freight Railroads and Amtrak, Railroad Negotiated Claims with Year employment claims lawsuits Total claims ,000 14,269 3,129 17, ,000 12,204 3,120 15, ,000 11,053 3,178 14, ,000 9,613 3,109 12, ,000 8,815 3,210 12,025 Note: Excludes the occupational illnesses of hearing loss and asbestosis and those cases where no payments were made. Source: Association of American Railroads. Table 1.2: Average Payout Per Settled FELA Injury Claim and Lawsuit for Large Freight Railroads and Amtrak, Dollars in constant 1994 dollars Year Negotiated claims Claims with lawsuits Average for all claims 1990 $24,414 $159,356 $48, , ,369 53, , ,159 58, , ,500 65, , ,421 69,023 Note: Excludes the occupational illnesses of hearing loss and asbestosis and those cases where no payments were made. Source: Association of American Railroads. 4 In this report, large railroads refer to Class I railroads. Class I is a designation used by the former Interstate Commerce Commission. In 1994, railroads with annual revenues of at least $255.9 million were designated as Class I. Class II railroads had annual revenues of from $20.5 million to $255.8 million, and Class III railroads had annual revenues of less than $20.5 million. We use the term small railroads to include all freight railroads other than Class I railroads. A more detailed description of the types of railroads included under this term can be found in chapter 4. Page 14

17 Chapter 1 Introduction Most Workers in Other Industries Are Covered Under No-Fault Injury Compensation Systems In contrast to railroad workers, workers in most other industries are covered by state no-fault compensation systems. Workers compensation legislation was initially enacted by most state legislatures in the early 20th Century. 5 One of the principal goals of this legislation was to provide injured workers with adequate benefits while limiting employers liability to compensating workers only for their lost wages and medical costs. Payments were to be prompt and predetermined to relieve employees and employers of uncertainty and eliminate the need to litigate the claims. The benefits available under no-fault compensation programs depend on the nature and extent of an injury. For less serious injuries, only medical benefits might be paid. For more serious injuries or illnesses, in addition to medical benefits, an employee might receive wage-loss benefits, vocational rehabilitation, or scheduled benefits for injuries resulting in permanent impairments, such as the loss of a limb or a bodily function. Each state sets its own benefit levels, and benefits vary considerably from state to state. Two groups of employees are covered by federally administered no-fault systems. The Federal Employees Compensation Act (FECA) covers federal civilian employees, and the Longshore and Harbor Workers Compensation Act (LHWCA) covers those in the maritime industry. Enacted in 1916, FECA covers more than 3 million federal civilian employees and authorizes the federal government to compensate employees when they are temporarily or permanently disabled as a result of an injury or illness sustained while performing their duties. 6 The Department of Labor s Office of Workers Compensation Programs administers this program. Disputes may be handled in one of the Labor Department s district offices or by the Branch of Hearings and Review. Appeals can also be made to the Department s Employees Compensation Appeals Board. FECA cases cannot be appealed to a court. Enacted in 1927, LHWCA covers about 500,000 longshore workers for disability due to a job-related injury or occupational disease occurring on the navigable waters of the United States or in adjoining shore areas. 7 The Department of Labor also administers this program. Disputes are handled informally in one of the Labor Department s district offices or before the Department s Office of Administrative Law Judges or the 5 For more information on workers compensation programs, see our recent report Workers Compensation: Selected Comparisons of Federal and State Laws (GAO/GGD-96-76, Apr. 3, 1996). 6 FECA also covers some nonfederal employees, such as some state and local law enforcement personnel and employees in the Civil Air Patrol. 7 LHWCA also covers certain other workers, such as some employees on military, air, or naval bases. Page 15

18 Chapter 1 Introduction Benefits Review Board. Unlike FECA cases, LHWCA cases may be appealed to a federal appeals court. There are important differences between FELA and no-fault compensation systems. First, both state and federal workers compensation systems cover an employee s work-related injury regardless of negligence on the part of the employer or employee by imposing strict liability on an employer for compensating most economic damages suffered by injured workers. However, they do not allow compensation for noneconomic damages. Second, benefits under no-fault systems are generally paid as losses occur, rather than in a lump sum as they are under FELA. While some states permit lump-sum payments, at least one state Texas has essentially banned them. Under FECA and LHWCA, compensation continues as long as a disability continues. Both FECA and LHWCA authorize higher benefit levels than most state workers compensation systems. While many no-fault claims are handled directly between employees and their employers or insurance companies, no-fault systems are not free from dispute or litigation. As the National Research Council reported in 1994, disputes may arise over issues such as eligibility for benefits, the level of benefits, and the readiness of workers to return to work. 8 Disputes may also arise over the permanency of injuries. For the most part, adjudicative bodies within a state (or the Labor Department, in the case of FECA and LHWCA) and the judicial system handle the resolution of these disputes. In recent years, litigiousness has tended to increase in no-fault compensation systems. Some states have also been concerned about increasing medical costs in workers compensation claims, and some (such as California and Texas) have made efforts to control these costs. Railroad Management and Labor Differ Over Continued Need for FELA Railroad management and labor disagree over how well FELA is working and whether it should be replaced or changed. Although the railroad industry has undergone substantial change over the years, including technological improvements designed to improve safety, the nearly 90-year old system for compensating injured railroad workers has changed little. In general, railroad management is dissatisfied with FELA and believes it should be replaced or substantially changed. In particular, management believes that because FELA involves issues of negligence, it creates an adversarial environment between railroads and their employees. Management also believes that FELA is unnecessarily costly. In addition, management sees little reason why railroads should be treated differently 8 National Research Council, Transportation Research Board, Page 16

19 Chapter 1 Introduction from other industries in terms of workers compensation. Railroad labor, on the other hand, believes that FELA is working well and should not be replaced or changed. In labor s view, FELA is a model system that fairly compensates injured workers and provides an incentive for railroads to operate safely. Labor believes the problem is not that FELA provides workers with excessive compensation but that no-fault compensation systems generally provide too little. Railroad Management Believes FELA Is Flawed and Should Be Replaced FELA has remained relatively unchanged in its nearly 90-year history despite substantial changes in the industry. Enhancements in braking and signaling, for example, have improved the safety of train operations. The Association of American Railroads (AAR), the trade association of the major railroads, issued a report criticizing FELA and claiming that it has adversely affected the railroad industry. 9 That report included data showing that, as railroad employment has declined and the number of injuries has fallen since 1981, FELA payouts have increased. In 1994, railroads paid about $4,200 per employee in FELA costs, up from about $2,250 per employee in AAR believes that FELA needs to be replaced. Many in railroad management believe that FELA is no longer appropriate to the modern railroad operating environment. Among the problems with FELA cited by railroad management are (1) the adversarial environment created between employers and employees because FELA requires the parties to establish fault, (2) the high degree of involvement by attorneys in FELA cases, (3) the unpredictability of FELA costs, (4) the practice of filing FELA lawsuits in court jurisdictions that have historically rendered judgments favorable to the plaintiffs, and (5) the high administrative costs. In general, railroad management questions why the rail industry must be treated differently from other industries regarding injury compensation. The National Association of Railroad Trial Counsel, an organization of 1,200 lawyers who provide legal services to railroads, believes that because both the right to recover and the amount of the recovery depend on assigning fault, FELA not only inhibits good employer-employee relations but also frustrates attempts to determine the causes of accidents. 9 Tort Abuse and the Rail Industry: The Facts About FELA, Association of American Railroads, Washington, D.C. (undated). 10 In constant 1994 dollars. Page 17

20 Chapter 1 Introduction Railroad Labor Believes That FELA Is Working Well and Should Not Be Replaced or Changed In contrast to management s view, railroad labor believes that FELA is effective and should not be replaced or modified. Railroad labor believes that FELA offers the railroads incentives to operate safely and gives workers the opportunity to recover full compensation for their injuries. Railroad labor does not believe that FELA should be replaced with a no-fault compensation system like state workers compensation because, in labor s view, injured workers would not be adequately compensated under a no-fault system. Railroad labor also takes issue with the criticisms of FELA voiced by railroad officials. For example, railroad labor points out that FELA is not a particularly litigious system because over 75 percent of the FELA cases are settled without any third-party intervention. Moreover, in labor s view, FELA provides the railroads with an incentive to operate safely and if they do so, they could lower their injury compensation costs. Attorneys representing railroad labor also took issue with railroad management s belief that FELA lawsuits are filed in jurisdictions favorable to plaintiffs. In their view, the practice of selecting court venues favorable to the plaintiffs to try FELA cases is no longer an issue because most states have acted to limit where suits can be filed. Objectives, Scope, and Methodology Concerned about the cost of FELA, the Chairwoman, Subcommittee on Railroads, House Committee on Transportation and Infrastructure, asked us to identify the implications for railroads costs and railroad workers of (1) replacing FELA with a no-fault compensation system or (2) modifying FELA. We were also asked to assess how FELA particularly affects the small railroads and determine the availability and affordability of insurance to protect against large FELA payouts. As agreed with the requester s office, we focused our analysis on comparisons between FELA, FECA, and LHWCA. This approach was taken to avoid duplicating work previously reported by the National Research Council that compared FELA with state workers compensation programs. To identify the cost and other effects of replacing FELA with a no-fault system with FECA- and LHWCA-level benefits, we used a computerized cost model developed by Mercer Management, Inc., for AAR. This model and the assumptions we used in performing our cost analysis are described in appendix I. As input for our analysis, we obtained information on all of the FELA claims closed in 1994 by four large railroads Burlington Northern, CSX, Norfolk Southern, and Union Pacific. These railroads employed about 60 percent of all employees at large railroads in 1994 and also had Page 18

21 Chapter 1 Introduction previously participated in a 1991 unpublished study of FELA by AAR. To examine how the administrative and dispute resolution mechanisms of no-fault compensation systems compare with those of FELA, we reviewed data from the Department of Labor on the FECA and LHWCA programs. We reviewed similar information on the California, Illinois, Nebraska, Pennsylvania, and Texas workers compensation systems. We selected these states because they had the largest number of freight railroad employees as of March Finally, we analyzed information from the Federal Railroad Administration to determine the number of lost workdays resulting from on-the-job injuries by the type of railroad. To evaluate the cost and other impacts of modifying FELA, we examined a number of proposals selected on the basis of discussions with officials at AAR and with the requester s office. We used data on claims closed under FELA in 1994 provided by the four railroads mentioned in the above paragraph to evaluate the financial impact of capping noneconomic damages under FELA. This information identified the number of claims that could have been affected by a cap and the dollar value of these claims. To analyze the impact of placing a cap on plaintiffs attorneys fees under FELA, we interviewed officials at selected railroads and obtained the views of railroad labor organizations. We also reviewed reports prepared by the Workers Compensation Research Institute a nonpartisan, not-for-profit organization that conducts research on workers compensation issues. To assess the use of arbitration, we interviewed officials from selected railroads and obtained information from the Federal Judicial Center on the use of arbitration in FELA cases in federal courts. The National Center for State Courts provided us with information on the use of arbitration in state courts. To evaluate the proposal to limit the jurisdictions where FELA cases might be tried, we reviewed state venue provisions in the 10 states with the most railroad employees in 1995, interviewed officials at selected railroads and attorneys who handle FELA cases, and obtained written comments from railroad labor organizations. To assess how FELA affects the small railroads compared with the large railroads, we designed a questionnaire to obtain cost and other information from the small railroads. After pretesting the questionnaire with officials from seven railroads, we surveyed 560 small railroads operating in the United States and asked them about their experience with FELA in To determine the universe, we used AAR s Profiles of U.S. Railroads, 1994 Edition and Supplement, a compilation of information on all railroads offering freight service in 1993, and the July 1995 membership list of the American Short Line Railroad Association. We received 437 Page 19

22 Chapter 1 Introduction responses, for a response rate of 78 percent. 11 The employee hours of the respondents to our survey represented 93 percent of the employee hours worked on the small railroads in The results of our survey of the small freight railroads are presented in appendix II. We also requested information on 1994 FELA claims and costs from 16 railroads identified by the American Public Transit Association as offering commuter service as well as from Amtrak. We received data from 12 commuter railroads and Amtrak. 12 Information on these railroads FELA settlements and costs can be found in appendix III. The organizations we contacted in the course of our review are listed in appendix IV. In addition, we received assistance from a consultant, Mark Dayton, who was the Study Director for the National Research Council s 1994 study of FELA. Our work was conducted from June 1995 through July 1996 in accordance with generally accepted government auditing standards. Agency Comments We provided the Departments of Transportation and Labor with copies of a draft of this report. We met with officials from these agencies, including the Chief of the Industry Finance Staff at the Department of Transportation s Federal Railroad Administration, and the Deputy Director, Division of Federal Employees Compensation and the Director, Division of Longshore and Harbor Workers Compensation at the Department of Labor. The Department of Transportation officials said they had no reason to disagree with the contents of the report and made no comments. The Department of Labor officials provided us with technical comments on the FECA and LHWCA programs, which we have incorporated where appropriate. 11 Of the 437 responses we received, 398 were usable. Two responses were submitted too late to be included in the analysis, and 37 responses were from railroads that were not operating, employed no workers directly, were operated by other railroads, or submitted blank questionnaires. 12 One commuter railroad, the Southeastern Pennsylvania Transportation Authority did not respond; the Tri-County Commuter Rail Authority did not have FELA data because it was under state workers compensation; and 2 of the 16 commuter railroads (Dallas Area Rapid Transit and San Diego Northern Railway) had not yet begun operations in Page 20

23 Chapter 2 Cost Savings From Replacing FELA With a Nationwide No-Fault Compensation System Depend on Many Factors Railroad management advocates replacing FELA with a no-fault compensation system, in part because of a belief that a no-fault system would be less costly. Whether replacing FELA with a nationwide no-fault system with FECA- or LHWCA-level benefits would reduce railroads injury compensation costs depends on many factors. 1 Prime among these is the number of railroad workers who are permanently disabled and are unable to return to work at their preinjury wages. Some injured railroad workers leave the railroad after receiving their FELA settlement, but railroad management believes that some of these workers are capable of returning to work and, therefore, would not receive permanent disability payments under a no-fault compensation system. However, the number of such workers is not known. The higher the proportion of this group of injured workers that can return to work at their preinjury wages, the higher the probability that railroads injury compensation costs would be reduced under a no-fault system. A no-fault system could reduce railroads administrative costs by eliminating the need to investigate negligence and to assess noneconomic damages. However, the time it takes to resolve claims that are contested under no-fault systems might not differ much from what it is under FELA. Impact of No-Fault System on Injury Compensation Costs Depends on Severity of Injuries One of the most important factors in determining the cost differences between FELA and a no-fault compensation system is the number of railroad workers who are permanently disabled by on-the-job injuries. On the basis of our analysis of FELA claims at four large railroads, the lower this number is, the greater the likelihood that the railroads compensation costs would be reduced under a no-fault compensation system. Under no-fault compensation systems, when injured workers recover and return to work at their preinjury pay level, their wage compensation benefits cease. In addition, under a no-fault compensation system, those workers who return to work would likely receive less than they would have under FELA because they would be compensated only for economic damages and not for noneconomic damages as they could have been under FELA. Finally, while it is difficult to estimate precisely the impact on death benefits of replacing FELA with a no-fault system, the cost difference would likely be small because death benefits are a relatively small portion of the total compensation outlays. 1 The discussion of injury compensation presented here excludes compensation of medical expenses. We assumed that employees would continue to be provided with such expenses under the railroads health insurance plans regardless of the compensation system. (See app. I for more information.) Page 21

24 Chapter 2 Cost Savings From Replacing FELA With a Nationwide No-Fault Compensation System Depend on Many Factors Potential Changes in Railroads Injury Compensation Costs Are Directly Related to Levels of Permanent Disability Replacing FELA with a no-fault system with FECA- or LHWCA-level benefits would reduce the railroads injury compensation costs only if many of the workers who currently leave a railroad after receiving their FELA settlement are physically capable of returning to work. Under a no-fault compensation system, benefits end or are reduced once an injured worker returns to work or takes another job. If those injured railroad workers who did not return to work under FELA were so severely injured that they could not return to any work, then under the no-fault alternative, they would receive permanent total disability payments as long as their total disability continued. The present value of this amount could be considerably greater than the lump-sum payment that a worker actually accepted under FELA. Officials from several railroads told us that once a settlement is made and an employee leaves a railroad, they do not keep information on any subsequent employment of these individuals. However, officials from several railroads believe that at least some of the workers who accept a FELA settlement and leave a railroad are physically able to return to the workforce. For the four large railroads in our analysis, we estimate that if all of the workers injured on the job who left the railroad after taking a FELA settlement were able to return to work, the railroads overall injury compensation costs in 1994 under either FECA- or LHWCA-level benefits would have been about one-third what they were under FELA. (See fig. 2.1.) 2 Under FECA, we estimate that injury compensation costs would have been $168 million and that under LHWCA, they would have been $149 million, instead of the $479 million actually paid. But if all of these workers were permanently and totally disabled, we estimate that these railroads injury compensation costs would have been about one-third higher than they were under FELA $650 million under FECA and $609 million under LHWCA. As the number of injured railroad workers who are permanently disabled declines, the estimated total compensation costs decline. Conversely, as the number of railroad workers who are permanently disabled increases, estimated compensation costs increase under the no-fault alternatives. 2 Our compensation cost estimates are the value of the current and future compensation costs for actual and future wage loss, scheduled benefits, rehabilitation expenses, and death benefits that would be payable under a no-fault system for the injury claims closed in 1994 in then-year dollars. We used a 10-percent discount rate to calculate the present value of future FECA and LHWCA benefits payments. (See app. I for our results using different discount rates.) The cost of future health insurance premiums is included for permanent total disability claims. Page 22

25 Chapter 2 Cost Savings From Replacing FELA With a Nationwide No-Fault Compensation System Depend on Many Factors Figure 2.1: Potential Injury Compensation Costs in 1994 for Four Large Railroads Under FELA and No-Fault Systems With FECA- and LHWCA-Level Benefits, Given Various Rates of Permanent Total Disability Compensation cost ($ in millions) Percent of PTD Among Workers Who Left Railroads After Settlement 1994 FELA Cost 1994 Costs With FECA-Level Benefits 1994 Costs With LHWCA-Level Benefits Legend PTD = permanent total disability Note: A 10-percent discount rate is used to calculate the compensation costs. The four railroads are Burlington Northern, CSX, Norfolk Southern, and Union Pacific. As figure 2.1 shows, the estimated compensation costs with FECA-level benefits would have been the same as they were under FELA if 65 percent of the workers who left the railroad after their FELA settlement were actually permanently and totally disabled. This break-even point would be 70 percent with LHWCA-level benefits because of the different benefit levels of FECA and LHWCA. 3 3 The degree of permanent disability among workers who leave the railroad likely ranges from low levels of partial disability to total disability, but the actual distribution of permanent disability is unknown. Various percentages of permanent total disability (100 percent disability) are used in figure 2.1 to illustrate the cost differences and break-even points between FELA, FECA, and LHWCA. The compensation costs for these percentages are the same as the costs for other possible permanent disability distributions; e.g., the cost for 50 percent of the workers who are 100-percent disabled approximates the cost for 100 percent of the workers who are 50-percent disabled. (See app. I for more details.) Page 23

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